Confused Roles Can Lead to Legal Liability in Joint Efforts

By James B. Kinsel on September 27, 2013

When two companies combine their efforts to accomplish a task, there can be confusion purposefully or incidentally created, as to which employees are acting on behalf of which company. And that confusion can lead to legal problems.

When companies enter into a contract, they owe duties to one another as are set out in the contract. If one of the companies fails to perform under the contract, the damaged company may recover money for damages as a result of the breached duties. An individual employed by the company that breached the contract is not ordinarily personally responsible because they are not a party to the contract. To hold the individual liable, they need a personal connection to the contract.

One such legal problem that a court recently addressed was whether additional duties, not set out in the contract between the companies, arose during the performance of the contract. Sometimes fiduciary duties can develop when an individual is involved in the performance of a contract due to a relationship between that individual and the damaged company. A fiduciary duty is a duty that arises out of a certain relationship, such as a company officer to the company. If a court finds that these other duties existed, it may hold individuals liable if they breach those duties. Whether or not those separate duties existed depends on a number of factors. The U.S. District Court for the Eastern District of Virginia articulated these factors in Fort Sill Apache Industries v. Mott, et al.

Fort Sill Apache Industries (“FSAI”) is a government contractor specializing in construction projects. FSAI had a Navy contract that it was about to lose. FSAI engaged TSI, a company in the business of providing consulting services to government contractors, to assist it with saving the Navy contract, acquiring new contracts, and manage FSAI’s finances.

Defendant Deborah Mott was a principal and employee of TSI. Mott was involved in performing the duties TSI owed under the contract. Specifically, she provided financial and payroll functions to FSAI. FSAI opened an operating bank account to handle necessary performance bonds for one of its contracts and appointed Mott as one of the signatories on the account. This gave her power to receive and transfer funds, write checks, establish payroll accounts, receive banking information, and manage all funds in the account.

When TSI canceled the contract, FSAI sued TSI for claims arising out of misconduct on the contract and damages for failure to perform its duties thereunder. FSAI also attempted to hold Mott personally liable, claiming that she was essentially a party to the contract due to her personal relationship with FSAI. After considering numerous factors, the court found that Mott was not personally liable on the contract.

Specifically, the court considered the employment relationship between FSAI and Mott. Mott argued that all of her work was performed pursuant to contractual agreements between the two companies and so the claims brought against her personally can only be brought against TSI. The court agreed with Mott. The court found that Mott performed financial and payroll functions to FSAI as a result of the contract between FSAI and Mott’s employer, TSI. Therefore, she was not an employee of FSAI. The court held that although Mott did perform some duties that would normally only be entrusted to a CFO, FSAI could have hired Mott directly to be an officer but chose not to. Other facts that persuaded the court that Mott should not be held liable for damages in her individual capacity were that FSAI didn’t pay Mott directly; Mott sent all work-related emails from only her TSI email address; and Mott never had an FSAI email address. Additionally, according to testimony from the former President of FSAI, Mott understood that when she held herself out as CFO for FSAI during certain business processes, it was “‘strictly for federal contracting and nothing else’ and had ‘no connection to being an officer of [FSAI].’” Op. at 12 (quoting a trial transcript). These facts show that FSAI knew its relationship with Mott existed solely because of the contract between FSAI and TSI, and Mott was not otherwise personally connected in any way to FSAI. Therefore, any tort claim arising out of misconduct under the contract had to be brought against TSI, not Mott, the court held.

Furthermore, FSAI argued that Mott personally breached duties that were independent of the duties TSI owed under the contract: fiduciary duties due to her access to the operating account and role as CFO. The court stated that common law duties, such as duties owed by one partner of a company to another, are independent from duties that may arise under a partnership agreement (or other contract). Op. at 23 (citing Three Rivers Landing of Gulfport, LP v. Three Rivers Landing, LLC, HG, 2012 WL 1598130, at ⃰4). However, the court found that those types of common law duties did not exist in this case. The court found that Mott was given access to FSAI’s operating account in order to perform the duties necessary under the agreement between TSI and FSAI. FSAI’s internal documents show it understood that Mott was an agent of TSI and acting as such as she performed CFO duties. Therefore, no independent duties were owed to plaintiff by Mott.

Whether or not a person can be held individually liable for damages outside of a contract can depend on whether they owed duties independent of the contract. If the court finds the individual was acting solely as an agent of the breaching company, only the breaching company will be held liable for damages. To avoid liability, individuals should use only the email address provided by their employer company, ensure they are paid directly by their employer company, and not hold otherwise themselves out to the public as an employee of the other company. The company who employs the individual should be clear with the contracting company as to the status of the employees to avoid any confusion from the start.